ISPs already allow businesses to co-locate servers, netflix could have done the same. But it'd have to at least pay colocation fees + bandwidth fees.
That said, I wouldn't be surprised if Netflix will/does pay some amount to colocate in some instances. The economics in some instances may cause the amount paid to be less than the cost of the CDN traffic.
You are ignoring the fact it is offering this to save the ISPs money and improve the quality of the service.
Its cheaper for the ISPs to put an openconnect box inside their network in the LA area than it is to pay for more networking equipment.
ISPs are expected to provide sufficient capacity at peering points with other networks to provide reasonable quality delivery to their customers.
How they handle that without demanding special privileges (as ISPs are in Netflix's case by holding traffic hostage until they are paid more money) is their buisness.